Inflation risks overdone; RBI rate cut likely in August: report

New Delhi: Inflationary impact due to the proposed hike in Minimum Support Price (MSP) for crops is likely to be “moderate” as the ruling market prices are higher in many cases, says a report.

According to Bank of America Merrill Lynch (BofAML), inflation risks are overdone and though inflation will climb to 5.4 per cent in the June quarter, it would be largely owing to base effects.

“Although the market is spooked by the announced increase in MSP prices, the actual inflationary impact is likely to be far more moderate, as the ruling market prices are higher in many cases,” BofAML said in a research note.

It further added that “we do not see much inflationary impact from the higher customs duty on mobile handsets, TV panels, processed food”.

On the Reserve Bank’s policy stance the report said, a rate cut is likely in August as the MPC will want to wait for good rains, like 2017, given the added uncertainty about agflation.

The Reserve Bank in its fifth bi-monthly review of this fiscal kept repo rate unchanged at 6 per cent and reverse repo at 5.75 per cent while raising the inflation forecast for the remainder of 2017-18 to 4.3-4.7 per cent.

The report further noted that the government will breach his fiscal deficit target of 3.3 per cent of GDP by 20 bps, to 3.5 per cent, in 2018-19, in the run-up to the 2019 polls.

“This (fiscal slippage) will largely be driven by lower- than-budgeted telecom proceeds, as well as tax collections,” it added.